Commerce, finance ministries to lock horns over SEZ tax bene

The commerce ministry and its finance counterpart seem to be heading for a face-off over direct tax benefits enjoyed by units within special economic zones (SEZs), which are proposed to be scrapped after March, 2011. That the direct taxes code, released this August and scheduled to be implemented from March, 2011, does not have provisions to provide income tax relief to SEZ-based factories, IT firms and BPOs, is making the situation grave for these two bodies. Though the code mentions that the existing benefits enjoyed by SEZ units operational by March, 2011, will continue to do so (a provision technically termed as grandfathering), it is not clear how this will be implemented. In addition, the code says that developers of the tax-free industrial enclaves will enjoy income tax benefits only till they recover their capital and revenue expenditure (which excludes cost of land). The underlying principle behind not allowing income tax incentives to the SEZ units is that new code discourages profit-based exemptions. While commerce ministry and SEZs maintain that the provisions of the SEZ Act of 2005, which provides tax relief to units and developers of the zones, should continue, finance ministry officials feel otherwise. “The proposed code has specific provisions dealing with the tax treatment for SEZ units and developers. Whatever is there will be adhered to,” said a finance ministry official. At the moment, there are over 700 SEZs under various stages of approval. These SEZs, proposed after the SEZ Act was operationalised in February, 2006, have seen investments of Rs 1,10,605 crore. There are 2,301 functional units inside SEZs and employ over 2,50,000 people. Meanwhile, the SEZ developers and units have been calling up commerce ministry and the Export Promotion Council for EoUs and SEZs, enquiring about the fate of their tax benefits. “The taxes code has lead to lot of uncertainty for prospective investors and developers who have put in money in the zones. The finance ministry should clarify how the tax benefits will be grandfathered. More over, the tax benefits to SEZs should continue, other wise, no units will set up shop inside the zones,” said L B Singhal, director general of EPCES.